Large loans like Rightpath's usually come in multiple installments of smaller amounts. "Each installment had a six-month extension subject to customary loan fee. We've done these kinds of projects before and expected the customary loan fee to be about $1,000," Reeder says.
"Well, the extension comes up, and he charges a $3 million loan fee. That's tantamount to loan sharking. It was the sledgehammer that broke the camel's back."
Pastor Stacy Lee at his church, Covenant Christian Center, in Peoria.
For years, Mortgages Ltd. investors received monthly checks with pay stubs like this one. (Click
here for more details.) The interest payments halted in June, and now investors just hope to recoup their capital.
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"One thing a commercial lender is prohibited from doing by the state is failure to fund a commitment. There's extensive documentation from multiple borrowers where Mortgages Ltd. didn't fund the commitment," says Don Gaffney, the attorney who took on Scott Coles.
Little did Gaffney know, but when he represented the Covenant Christian Center pro bono in 2006, he was getting a jump on one of the biggest investor-driven bankruptcy cases in Arizona history.
He now represents Grace Communities, a developer that was using a Mortgages Ltd. loan to remodel the Hotel Monroe in downtown Phoenix. Like Rightpath Limited Development, Grace Communities says its loan was never fully funded.
They're not alone. Charles Lamar and his son Justin are principals with KML Development. The group had planned two high-rises, one in Tempe and one in Phoenix. Mosaic was going to be a 21-story, mixed-use condo tower in Tempe, with a Whole Foods grocery store at ground level.
On a recent Tuesday, Charles and Justin are sitting in the vacant Mosaic showroom in downtown Phoenix. The showroom has model kitchens and living rooms — all featuring the high-end flooring, cabinets and countertops that were going to be available at Mosaic.
The lights are off in the showroom, though, because Mosaic won't be rising from the ground in Tempe anytime soon.
Mortgages Ltd. executives signed a $130 million loan with KML and then showed up for the groundbreaking in Tempe — in October 2007. Two months later — and just $30 million into the loan — Mortgages Ltd. ran out of money.
Today, Mosaic is little more than a $30 million hole in the ground. If Mortgages Ltd. had funded the loan, it would be a 21-story concrete and steel skeleton, with money in the bank to put skin on the bones.
Lamar isn't one to speak negatively — about Coles or Mortgages Ltd. He chooses his words carefully and seems sincere when he says that bad things happen and he wants to work with the company to find an agreeable business resolution.
"As Mortgages Ltd. peaked, they aggressively started pursuing these construction loans. Most of the developers were led to believe that money was there and available. Obviously, when the money stopped, there were a lot of developers left without the funds that they were promised," Lamar says.
"In a perfect world, if the money kept coming in to him, I guess we wouldn't be having this talk. Unfortunately, things changed and everyone became aware very quickly that Mortgages Ltd. did not have the money."
Lamar says that up until the bankruptcy, Mortgages Ltd. was still charging interest payments and increasing KML's balance — even though it hadn't funded the entire loan.
"They were just collecting new money from investors, to give to old investors. The balance is growing and growing while we're just at a standstill," he says.
"We're looking at this as there are a lot of victims. We're not looking to exploit or take an opportunity to go beyond a reasonable solution. We're not trying to be opportunistic. That's not us. It's not our style.
"It's important that all those investors know there's someone out there who's thinking of them. In the court, it's portrayed as us and them. From our perspective, it's not. I care deeply for Barbara Porter [an investor mentioned in "The Rise and Fall of Scott Coles," July 31] and people like that. It just breaks my heart to see that. It motivates me all the more to want to find a way to help."
Perhaps no one understands Mortgages Ltd.'s rise and fall better than David Crantz, the president and CEO of Landmarc Capital & Investment Company in Scottsdale.
Crantz runs the closest thing in Arizona to a company that parallels Mortgages Ltd. Crantz's company specializes in the same short-term construction bridge, or "hard-money," loans as Mortgages Ltd.
Like Coles, Crantz grew up in Phoenix and learned the business of bridge-lending from his dad. In fact, Crantz's dad and Scott Coles' dad (Chuck Coles, who founded Mortgages Ltd. and passed away in 1998) knew each other well — as did their sons. Their companies even rely on many of the same investors and developers.
"They're not gonna know [everything Scott did] for a couple years. But it's very, very obvious to professionals in my industry what he did over there," Crantz says.
"It's black and white. He over-lent on properties, period. I know this for good reason because one of his major borrowers came to my company to borrow money from us. We would never lend him money. I knew [Mortgages Ltd.] had a lot of money out. I used to see the deals come across my desk. We'd see how upside down these were."
